Question

What types of business decisions can the managerial accountant support? Give an example of one decision that is supported by managerial accounting and the type of report that might be generated to help make the decision identified.

Answer 1

Answer
Following are the various types of decisions managerial accountant can support :
1) Buy or rent : Whether to Buying or taking on rent is beneficial
2) Pricing of goods or services to be provided : Cost sheet to be prepare for each and every product and decision is taken on that basis
3) Lease or Buy : Whether to take on lease or buy it
4) Whether to produce extra unit at the same production capacity : Whether it is beneficial to produce extra number of units
5) Continue or shut down the production : At what level break even is achievable
Give an example of one decision that is supported by managerial accounting and the type of report that might be generated to help make the decision identified.
Lets takes the examples of pricing of goods
When a managerial accountant prepare cost sheet , he needs to identified many factors because on the basis of the cost sheet prepare , management will check whether the product or goods is profitable or loss making, at what level of capacity break even point is achievable, what is the proportion of fixed and variable cost, what is opportunity cost etc.
Management will use Income Statement Format for decision making. Income statement prepared on the basis of contribution Margin Approach means in it all variable expenses are deducted from sales to derive contribution figure and from it fixed expenses are deducted to get the figure of net profit or loss. Here all expenses are classified on the basis of nature of expenses. From this form of income statement any layman can also get the idea of how much profit is available to cover the fixed cost. Also we can get the idea of how much fixed and variable expenses are incurred for any products or services which help to control the expenses. In normal profit and loss account we will get gross margin which is derived after considering the fixed and variable expenses while here we get contribution margin.
Format of income statement is as under
The format of Contribution margin income statement :
Particular	Amount
(A) Sales	xxx
Less : Variable cost
Direct material cost	xxx
Direct labour cost	xxx
Variable selling and admin. Expenses	xxx
Other variable cost	xxx
Total cost (B)	xxx
Contribution margin (A- B )	xxx
C. Less Fixed cost	xxx
Net profit or loss	xxx